A guide to income in retirement

Step 1: Changing with the times

Inflation and longer life expectancy requires a shift in mindset and approach

Times have changed and making informed choices about your money is the best way to look forward to the future with confidence.

Let’s take a look at some of the factors that may influence retirement income and don’t worry, the point here is that you can help combat these factors with good planning.

Factor 1: Inflation

When it comes to managing money in retirement, inflation is always something to keep in mind. The chart below shows how even modest levels of inflation reduce the real value of retirement income. With inflation of 5% a year, buying power for the same level of income is down by half after 14 years. Retirees don’t have the luxury of salary increases to keep up with rising living costs. This means they are particularly at risk from the impacts of a sudden inflation spike or longer period of higher inflation.

Figure 1: The impact of different inflation rates on retirement income

 

Source: ABS, RBA occasional paper #8 and Table G6 labour costs (as released in 2012). Underlying wage data is from the ABS and is based on average male earnings.

Factor 2: Lifestyle changes

Some retirees find their lifestyle changes as they grow older, and they spend less as a result. Research from the Grattan Institute has shown retirees tend to spend less over time, as their budgets for travel and dining fall.

Medical expenses can also mount up as you move through retirement. Older retirees can expect to spend more on medical expenses, care, and assistance in the home.

Factor 3: Life expectancy

Here’s a quick reality check on retirement – there’s a good chance you’ll live longer than you think.

When it comes to planning for the future, perhaps the biggest blind spot we have is how long we’ll spend in retirement. A male who reached age 65 between 2019 and 2021 can expect to live to 85, compared to just 77 if he reached 65 between 1960 and 1962.

Life expectancy rates published by the Australian Bureau of Statistics take into account chances of survival until a certain age, but they don’t account for the mortality improvements enabling each generation to live longer than the one before. When you add this trend into the picture, a more realistic life expectancy of 88 for males and 90 for females emerges. That’s potentially 30 years of retirement you’ll need to pay for.

As shown in the chart, a 65-year-old male has a 50% chance of reaching age 88. There is also a 20% chance of living to 94, and a 10% chance of living past 97.

Average life expectancy	From birth	From age 65	From age 65 with mortality improvements
Males	80	84	88
Females	84	87	90

Probability of a 65-year old male surviving to different ages

 

Australian Bureau of Statistics, Retirement and Retirement Intention, Australia, 2018-19 and Australian Life Tables 2015-2017 with 25-year mortality improvement factors from the Australian Government Actuary.

A comfortable retirement lifestyle and income security go hand in hand

With up to three decades to plan for, it’s important to know you’ll have income, regardless of how long you live.

Earnings from investments like shares aren’t guaranteed, and money from an account-based pension usually stops once the balance runs out. Income from a lifetime income stream is guaranteed to be payable throughout your lifetime, however long you live. Your lifetime income may also include payments from the Age Pension if you’re eligible.

Plan for a retirement with less worry

Retirement can be a life-changing event. Moving from earning an income to drawing on your retirement savings and investments can mean a change in your thinking. And it can bring up financial concerns you’ve never had to think about before, such as outliving your savings and keeping up with inflation.

Later in this guide we’ll show things you might consider in building a resilient retirement portfolio and enjoy the peace of mind that can help you spend confidently in retirement.

Test your knowledge of step one

One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.

Q1.Over 14 years, annual inflation of 5% per year could reduce your income by:

Q2. Your costs for medical expenses, care and assistance are likely to decrease as you age:

Q3. With mortality improvements factored in, the average life expectancy of a 65 year-old male in Australia is:

Step 2: Your retirement ‘pay cheque’

Know your options for regular income in retirement

When you’re working it’s reassuring to know there’s money coming in each month. Then retirement happens and it’s up to you to generate income to live on. The good news is you don’t need to give up that stability.

As humans, we’re wired to stick to what we know. It feels familiar and comfortable, but it can help to change our thinking so that our assumptions can match up with reality.

Super is only one part of your retirement income plan. In reality, most people will rely on other sources such as income from other investments like shares or property or the Age Pension.

In this step, we highlight three key sources of retirement income, and we get to the bottom of some popular myths about each one. 

1.  Income from your super: Account-based pensions or allocated pensions

When you retire, one option is to roll your super over into an account-based pension to provide you with a regular income in retirement. You get to choose how often you receive your income payments, and how much you withdraw each year (provided it meets the minimum withdrawal requirements). You can generally make lump sum withdrawals at any time.

Account-based pensions allow you to take out more money from one year to the next so your income can keep pace with inflation. But this can introduce the risk of running out of money, depending on investment returns and how much you withdraw over time.

This highlights a common misunderstanding about the level of certainty account-based pensions offer. As each payment will draw from your super savings, your payments will generally stop when your savings run out.

2.  Lifetime income streams

A lifetime income stream, such as a lifetime annuity, delivers guaranteed regular income payable for life, in return for a lump sum from your super or savings. Our range of annuities give you the option to choose payments that are fixed, or linked to changes in inflation, interest rates or investment markets. Lifetime annuities come with other features too, which you can read about on our website.

Unlike an account-based pension, payments from your lifetime income stream will be made for as long as you live and if you choose, for your spouse’s life. This is how our lifetime income options help protect you from longevity risk in a way many other investments can’t.

A lifetime annuity can work alongside your account-based pension

People often think they must choose between an account-based pension and an annuity. But you don’t have to put all your super or savings into just one or the other. You can put some money towards an annuity, while the rest stays in your super or other investments.

An annuity can provide an additional layer of protection in retirement. With income payments guaranteed for your lifetime you can feel more confident about your retirement spending now.

	Account-based pension	Lifetime annuity
Regular payments	Yes	Yes
Income payments	Payments generally continue until your investment runs out	Payments are payable for life
Easy access to your capital/ability to make partial withdrawals	Usually, yes	While lifetime annuities are designed to be held for life, there is usually a long period based on your life expectancy where you can access a lump sum if your circumstances change. Partial withdrawals are not generally available.
Inflation protection	No – your payments may increase in line with inflation, but generally your capital isn’t protected as you are simply just withdrawing more from your balance	Option to index payments to inflation

3.  Income from The Age Pension

Once you reach Age Pension age you might be eligible for Age Pension payments, plus other benefits. Eligibility for the Age Pension depends on your circumstances and Centrelink’s assets and income tests. You can find out more about Age Pension rates here.

In Australia, we’re lucky to have the Age Pension to fall back on if our retirement savings run out. But the Age Pension alone may not be enough. When we look at cost-of-living estimates in the table below, it’s clear that the full Age Pension entitlement isn’t enough to cover living costs for many retirees.

Association of Superannuation Funds of Australia (ASFA) Retirement Standard figures

	Comfortable lifestyle budget p.a.	Modest lifestyle budget p.a.	Age Pension p.a.
Couples aged around 65	$70,806	$45,947	$41,704
Single person aged around 65	$50,207	$31,867	$27,664

 

Other investments to support you in retirement

There are some other investment options that can supplement your income in retirement, such as term deposits, property and shares. All these options come with their own pros and cons, and you can read more about them here.

What we get asked

Q.  How will a lifetime annuity affect my Age Pension?

A.  Purchasing a lifetime annuity could immediately increase your Age Pension payments. Unlike many investments which are 100% assessable for the assets test, some lifetime annuities are partially exempt.

Only 60% of the amount invested into a Challenger lifetime annuity counts towards the relevant Centrelink/DVA asset test, through to age 84, or for a minimum of five years. From then onwards, only 30% of the purchase price will count.

For the income test, only 60% of your lifetime annuity payments are assessable.

Test your knowledge of step two

One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.

Q1.  Payments from the majority of account-based pensions will continue after the balance runs out:

Q2.  If you invest in an account-based pension you can’t also invest in an annuity:

Step 3: Navigating the risks

Avoiding potential pitfalls for your retirement

We all look forward to enjoying a long, healthy life. But outliving your savings could make the reality less appealing. Making sure your money lasts throughout your retirement means being realistic about how much you’ll need to be comfortable and keeping your eye on the ball.

It’s only natural to expect things to turn out for the best. Our optimism can serve us well in life, but when it comes to money, balancing a positive outlook with facts is important. In this step, we cover off the big four retirement income risks. 

The big four retirement income risks

1.  Later in life you’ll have less time to recover from market volatility. Exposure to investments such as shares and property comes with the risk of market volatility. When investments earn negative returns, your retirement savings are falling in value. If you need to make withdrawals from your savings or investments to pay for living expenses, it has a twofold impact on your retirement finances. We call this market risk.

2.  Poor returns on investments when your savings are at their peak may have a bigger impact. In retirement, timing is everything. If the order and timing of your investment returns is out of sync with your income needs, it could result in less money for your retirement. We call this sequencing risk.

3.  You don’t know how long you’ll live. When you don’t know how many years to plan for, it’s may be worthwhile to make a generous estimate to feel confident your money will go the distance. This will give you a better chance of planning for enough income to last throughout retirement, without having to rely solely on the Age Pension to cover your basic living costs, let alone things like medical bills, aged care, or in-home assistance. We call this longevity risk.

4.  Inflation may chip away at the value of your savings. Even small increases to the cost of living over time can have a significant impact on how far your money will go. With inflation of 5% a year your spending power on the same income is cut by half in just 14 years. Without the right strategies in place, increases in inflation could mean your retirement savings will no longer cover your living costs. We call this inflation risk.

Is your retirement income diversified?

Ensuring your retirement income is diversified can help manage the financial risks you face in retirement. Answering these questions gives you some idea of whether you need to revisit your retirement income plan

1.  Does your retirement income come from a range of different income sources?
2.  If there’s a significant downturn in the markets, will your income still cover day-to-day expenses?
3.  Does your retirement income portfolio bring you income certainty, balanced with greater returns?
4.  Does your retirement income include both low risk and higher risk investments?
5.  Do you have income that is payable for life, no matter how long you live?

How did you go? As a general rule, the more questions you answered ‘Yes’ to, the more diversified your retirement income is likely to be.

Test your knowledge of step three

One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.

Q1.  A full entitlement to an Age Pension will cover the costs of a ‘modest retirement lifestyle’ (as defined by the Association of Superannuation Funds of Australia Retirement Standard).

Q2.  The impact of poor market performance on your super is greatest:

Q3.  Your income payments from an account-based pension are impacted by share market movements or interest rate fluctuations.

Step 4: Secure retirement income

Spend with confidence now, and in the future, with a comprehensive retirement income plan

Every type of income has its benefits. A smart retirement portfolio can help manage risk and make sure your money is working for you at every stage of your retirement. Like any kind of investing, tapping into diverse sources of retirement income is key in helping you balance risk and return.

We all want different things from retirement but share a common need: income. Our lifetime income products deliver guaranteed regular income payable for life, regardless of how long you live.

When you know you have your income needs covered, it can free you up to enjoy life more. Knowing you have a resilient investment portfolio can help give you the peace of mind to spend with confidence and make the most of your time in retirement.

Building a resilient retirement portfolio

Being smart about how you combine your sources of income can help provide you with enough to live on today, and over the long term. What could a comprehensive retirement income plan look like? Including both of these options can help you put yours together:

1.  Safety net income to cover your basic living costs – making your safety net income a priority means ensuring you have enough income for day-to-day costs, for however long you live. As we’ve seen, the Age Pension alone may not be enough to cover even a modest cost of living. Combining Age Pension payments with regular income from a lifetime annuity can top up your income to help cover essential costs.

2.  Money you can access at any time – with the basics covered, you can plan for additional regular income for the extras, such as going out to dinner or holidays. As account-based pension payments aren’t guaranteed and may run out over time, it may be best to put this income towards non-essential spending.

Test your knowledge of step four

One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.

Q1.  Safety net income, as we’ve defined it, is:

Q2.  Income from investments such as bank savings or shares are protected from inflation:

Step 5: Enjoy your whole retirement journey

Enjoy peace of mind with the benefits of regular lifetime income

Experiencing the stability of income for life when you’re no longer receiving a regular pay cheque could make all the difference. Instead of being stressed about money you can enjoy some of the best years of your life.

With around 700 Australians retiring every day, it’s no wonder the Government is placing greater focus on ensuring retirees have access to a range of retirement income products to help fund retirement. 

How could lifetime income benefit you?

•  Income that lasts for your lifetime – when you set up a lifetime annuity, you’ll have guaranteed regular income payable for life - regardless of how long you live.

Tip: With certain lifetime annuities you can nominate a beneficiary (or your estate) to receive a guaranteed death benefit if you die early.

•  Helping you to spend confidently in retirement – regular payments are guaranteed for your lifetime so you can feel more confident about your retirement spending.

•  Inflation linked income to help protect your lifestyle – Inflation measures the change in the cost of living over time. Payments from lifetime annuities can be linked to annual inflation changes, helping you to continue to afford tomorrow what you can afford today.

The benefits of regular lifetime income

	Enjoy income for life
	Cover everyday living costs
	Option to protect from inflation

What we get asked

Q.  What happens to my money if I die?

A.  A guaranteed death benefit is payable for your withdrawal period (which is based on your life expectancy up to a maximum of 27 years). The guaranteed death benefit is equal to 100% of the amount invested for the first half of withdrawal period. For the remainder of the withdrawal period, we will pay a guaranteed death benefit equal to the maximum withdrawal amount (see next question). We don’t reduce the death benefit for any income that has already been paid to you. You have the flexibility to remove this feature in return for higher regular payments. See the relevant Product Disclosure Statement for more information.

Q.  What if I need access to my investment?

A.  There’s flexibility to withdraw your annuity investment at any time during your withdrawal period (which is based on your life expectancy up to a maximum of 27 years), so you have access to a lump sum if you ever need it. The maximum withdrawal value starts at 100% of the amount invested and steadily reduces to nil (the actual withdrawal value we pay you is impacted by movements in interest rates and an allowance for the cost to us of breaking the investment. That is why it is only possible to determine the withdrawal value at the time of withdrawal). See the relevant Product Disclosure Statement for more information.

Q.  Is the income taxed?

A.  Regular income and lump sum withdrawals are tax-free if you use your super to invest and you’re age 60 or over.

If you invest with other non-superannuation personal savings, certain part of your payments are considered as return of capital and are exempt from tax. If your payments are higher than the exempt portion, the excess is taxable income. If your payments are lower than the exempt portion, then your payments are tax-free. We provide an annual PAYG statement with all the details you need to complete your tax return.

Take the worry test

Could you benefit from a lifetime income stream? Answer these four questions to find out.

1.  Do you worry about whether you’ll outlive your retirement savings?
2.  Do you worry about covering day-to-day living costs later in retirement?
3.  Do you worry that the Age Pension may not be enough to live on in the future?
4.  Do you wish you had more peace of mind with your income?

How did you go? If you answered ‘Yes’ to any of the above questions, speak to your financial adviser or call us on 13 35 66.

Test your knowledge of step five

One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.

Q1.  Even if you live to 100 years old or more, you will still receive payments from a lifetime annuity:

Q2.  You can use your super or other savings to buy a lifetime annuity.

What’s next?

Do your own research into annuities before making any decisions. Your financial adviser can also help, as can calling our Investor Services team on 13 35 66.

You may want to read about the products we offer before contacting your adviser or our team, which you can do in the product section of this website. All relevant Target Market Determinations (TMDs) and Product Disclosure Statements (PDSs) are also available within each product page.

Speaking to an expert

If lifetime income appeals to you, an important step is to seek financial advice. Your financial adviser can look at your personal circumstances, and help you answer some important questions:

•  Is an annuity right for me?
•  What kind of annuity should I consider?
•  When is the right time to invest?
•  How much should I put into an annuity?
•  How will an annuity interact with my Age Pension?
•  What happens if I need access to my money?
•  What happens when I die?

Tip: If you’d like assistance finding a financial adviser, simply fill out this form and let us know some of the things you’d like to speak with an adviser about.

Why Challenger?

Before investing in an annuity, it’s good to know your money is in safe hands. Challenger is Australia’s largest provider of annuities. Since 1985, it’s been our mission to provide retirees, like you, with financial security in retirement through safe and reliable income. With $23 billion in assets under management (as 30 June 2023), thousands of retirees trust us to provide them with confidence and certainty in later life.

As we’re regulated by the Australian Prudential Regulation Authority (APRA), we must hold a minimum amount of capital to help ensure that we are always in a position to deliver on our payments to you – now and in the future. You can learn more about our promise here.

If you would like to hear more from Challenger, sign up for our news and insights newsletter, Retirement Matters, designed for Australian retirees.